RBI Injects $5.8 Billion Cash As Borrowing Costs Top Policy Rate

India's central bank injected short-term cash into the financial system on Wednesday, as monthly tax payments drove overnight rates higher.

The authority added 500 billion rupees ($5.8 billion) via a two-day repurchase auction, it said in a statement. The cutoff rate was 5.53%, and the central bank received bids totaling 719 billion rupees, it said.

The latest move followed a jump in a key gauge the Reserve Bank of India uses to guide monetary policy, which rose to 5.78% on Wednesday, above its 5.5% benchmark. This divergence adds to several episodes where short-term rates have overshot the policy rate, prompting the central bank to consider a new model for managing system liquidity.

“It seems that banks tendered very aggressively at the last variable rate reverse repurchase operation and once the GST outflows hit the system, they were left with a situation they did not envisage,” said Abhishek Upadhyay, an economist at ICICI Securities Primary Dealership Ltd., referring to the RBI’s cash withdrawal steps.

The current episode has been amplified by around two trillion rupees parked with the RBI until Friday through a seven-day variable rate reverse repurchase auction, according to DBS Bank Ltd. In such auctions, the central bank soaks up cash from banks in exchange for securities.

Surplus liquidity, measured by excess cash banks park with the RBI, was at 2.2 trillion rupees ($26 billion) as on July 22, lower than 3.9 trillion rupees on Friday, according to a Bloomberg Economics index.

Bond traders plan to seek more clarity from the central bank on the level of surplus liquidity it considers appropriate, following its recent cash-draining operations, Bloomberg News reported Tuesday, citing people familiar with the matter. The RBI’s next policy meeting is due on Aug. 6.

“The RBI will likely continue to offer the VRRR auction, though likely reduce the size,” said Nathan Sribalasundaram, a rates strategist at Nomura Holdings Inc. “Banks are likely to be a little more cautious this time around.”